Commercial Paper Market Falls to Least Since July, Fed Says

Sept. 27 (Bloomberg) -- The market for corporate borrowing
via commercial paper contracted to the lowest level in more than
two months as U.S. financial institutions turned more to central
banks for funding.

The seasonally adjusted amount of U.S. commercial paper
dropped $18.1 billion to $990.1 billion outstanding in the week
ended yesterday, the fourth straight decrease, the Federal
Reserve said today on its website. It’s the longest stretch of
declines since the period ended March 7 and the least since the
market touched $982.5 billion in the period ended July 18,
according to Fed data compiled by Bloomberg.

Financial borrowers have relied increasingly on central
banks for funding as demand has declined for short-term
obligations on concern that Europe’s sovereign-debt turmoil may
contaminate balance sheets globally. The Fed said on Sept. 13 it
will expand its holdings of long-term securities with purchases
of $40 billion of mortgage debt a month in an additional round
of so-called quantitative easing.

“The U.S. financial system simply remains over-reserved;
the anticipation and arrival of QE3 exacerbates this condition
and mitigates the need to issue domestic financial CP,” Howard
Simons, strategist at Bianco Research LLC in Chicago, wrote in
an e-mail.

U.S. Banks

Commercial paper issued by U.S.-based banks fell $10.8
billion to $275.7 billion outstanding, the fourth straight
decline and the lowest level since $273.7 billion in the period
ended June 20, according to the Fed. The amount sold by non-U.S.
financial institutions rose for the first time in three weeks,
increasing $3 billion to $232 billion.

“Lately there has been evidence of a weakening in
industrial output both in the United States and abroad,” which
“is likely dampening the need for working capital, resulting in
a reduction in commercial-paper issuance,” Tony Crescenzi, a
portfolio manager and strategist at Pacific Investment
Management Co. in Newport Beach, California, wrote in an e-mail.

Corporations sell commercial paper, typically maturing in
270 days or less, to fund everyday activities such as rent and
salaries.